There is a question that many investors ask. Should you put your money in equity, bonds, real estate and gold or should you invest in only one area?
lets see how investments world is works.
ome say—rightly—that investing in a single asset will deliver better returns than putting the eggs in different baskets.
But they fail to understand one thing: if the asset underperforms, they see their money erode and not even match inflation (see table).
Remember that long-term investments should earn more than inflation to create wealth. Investors should feel like listening to music while investing and such a portfolio will deliver a consistent return.
Some people buy a particular asset when it is cheap. For example, when the price-earnings ratio of Sensex is less than 13, equities are cheap and some people invest heavily in equity. They also reduce exposure when the PE ratio crosses 24. This is called Tactical Asset Allocation.
But today, with other asset classes delivering poor returns, investors are pumping more money into equity without understanding the risk of high valuations. On top of it, some investors fearlessly chase equity, especially mid- and small cap funds/stocks.
Some people like to have a constant allocation across the asset classes that suits their risk appetite. To follow this strategy, you need to rebalance the portfolio, if any one of the assets deliver an abnormal return to bring balance to your portfolio.
But if you want to be active and understand your risk appetite, go in for tactical allocation.
An English business magazine once recommended a fund for allocating assets across areas: it invests 35% in equity and 35% in debt, 26% in gold and 4% in cash.
Over seven years, it delivered 8.1 percent!
If you are less than 40 years of age and want to invest for educating your children or saving for their wedding expenses or for your retirement, set aside 40 to 50% in equity,30-40% in debt and 5-10% in gold.
In the equity class, spread the money equally among large-, multi-, mid- and small caps to ride smoothly in your portfolio. If you are close to 50 years, restrict exposure to mid- and small cap to less than 30% of the investment.
A 25% allocation against all four asset classes.
(Writer is SEBI Registered Investment Advisor, Founder Myassetsconsolidation.com)